Bank loans for Gas Stations

The truth about commercial bank loans for gas stations

The other day I was watching late night TV and an ad came up for a used car dealer whose pitch was that “everybody got financed”, the car dealer proceeded to argue that banks are not interested in financing unless you are rich. Normally these types of ads bother me, because they prey on people’s fears of rejection. They make people so afraid of a bank saying NO that they do not even try. While you might think that this is limited to the consumer lending market, there are some segments of commercial lending where other financial institutions use the same type of marketing. This is evident in the gas station loan segment where there is a mistaken impression that banks are not interested in originating loans to gas stations.

Commercial loan for Gas Stations

While it is true that in the past commercial banks have not been receptive to lending to gas stations, a lot of that has gone away as good commercial borrowers have decreased in recent years. From personal experience, I know that my employer went from financing five gas stations a couple of years ago to financing about 40 gas stations as of the end of 2012. I am not saying that all of the commercial bank lenders have changed their attitudes about gas station lending, but this type of loan is more common now and a potential borrower would be doing himself a disservice by not inquiring about it.

Why have banks been reluctant to lend to gas stations? The main reason has been the potential for environmental liability. The bank is concerned about having to take possession of a dirty property, and having to pay for the cleanup. However, a lot of that risk is avoided by properly documenting the file with environmental site assessment reports prepared by environmental professionals.

What are the benefits of using a commercial bank for gas station financing? The number one benefit is lower overall cost. While some of the specialized gas station lenders can come up with similar rates in today’s low rate environment, there are usually other fees associated with their underwriting. A commercial bank will usually charge a 1% fee plus costs at origination only.

What kind of deal structure can I expect from a bank? The typical deal provides between 70% and 75% financing. However, there is room for allowing a portion of the equity to be in the form of a seller note or even a third-party subordinated junior note. In fact, last year I was part of a deal involving half a dozen stations that had a portion of the purchase price financed by a subordinated mezzanine loan from an investor. In that particular case, the borrower only had to come up with 17% of the purchase price from his pocket. As long as the gas stations produce enough cash flow to provide sufficient debt service for both loans, the deal is doable. You can also expect an amortization between 20 and 25 years.

What will a bank be concerned with? Other than the fact that there will be some concern due to the recent price volatility of fuel, the lender will try to assess the operational risk associated with your request {mitigated by experience}, and competitive pressures specific to the location of the station.

Will the bank finance the convenience store equipment also? Unless the loan is structured as an SBA loan where you can sometimes combine all business assets and amortize them over a long period of time, a loan for business assets other than real estate would be a separate facility. In fact, when one of our appraisers provides estimates of values for gas stations, we get a break down as follows:

Contributory Value of Land (As If Vacant)

Contributory Value of Real Property Improvements

Contributory Value of Petroleum and Other Site Equipment

Contributory Value of Convenience-Store Equipment

The bank is more likely to offer long-term financing for the land and the real property improvements, while the equipment will be financed under a quicker amortization.

You can learn more information about the managing of gas stations as well as getting bank financing by buying and reading these books from Amazon Turning Convenience Stores Into Cash Generating Monsters
and The SBA Loan Book, 3rd Edition: The Complete Guide to Getting Financial Help Through the Small Business Administration

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